Difference between CTC - Gross - Net Salary

Cost To Company - CTC:
Cost to Company or CTC as it is commonly called, is the cost a company incurs when hiring an employee. CTC involves a number of other elements and is cumulative of House Rent Allowance, Provident Fund and Medical Insurance among other allowances which are added to the basic salary. These allowances may often include free meals or meal coupons, such as Sodexo and the like, office space rent, cab service to-and-fro office, and subsidized loans et al. Basically, all these elements when combined together, form the entire Cost To Company.
To put it in simpler terms, CTC is basically a company’s spending on hiring and sustaining the services of an employee.

Let’s elucidate what CTC looks like with an example:
Mr. A has been hired by a company at a CTC of Rs. 4,00,000. A breakdown of his yearly income is illustrated below:

Basic Salary: Rs. 2,20,000
HRA: Rs. 88,000
CA: Rs. 19,200
Medical Expenses: Rs. 15,000
EPF Contributions: Rs. 21,600
Gratuity: Rs. 18,326
Special Allowance: Rs. 17,874
CTC is basically the sum total of Direct Benefits (sum paid to an employee on a yearly basis), Indirect Benefits (sum the employer pays on behalf of the employee), and Saving Contributions (saving schemes the employee is entitled to).

CTC = Direct Benefits + Indirect Benefits + Savings Contributions
Here’s every single element of a CTC broken down:
Basic Salary: Unlike other aspects of CTC, your basic salary will not vary and remains a constant always. The entire amount of your basic salary will be part of your in-hand salary.
Allowances: As part of your salary structure, you will receive a number of allowances which help you take care of your basic needs. These include:
House Rent Allowance (HRA): HRA is part of the CTC an employer provides its employees. HRA usually comes with tax benefits in case employees pay for accommodation each year and comes up to about 10% of the take-home salary.
Leave Travel Allowance (LTA): LTA is yet another tax-exempt element of a CTC which is provided for employees to cover their travel expenses anywhere within the country. Note that an LTA only pays for the travel allowance not for other expenditures like food, drinks, and the like.
Dearness Allowance (DA): Inflation numbers keep rising year or year and Dearness Allowances are provided to tackle this issue. This is basically a cost of living adjustment given to mitigate the effects of inflation on the economy. Other such allowances include medical, vehicle, mobile phone, incentives, and special allowances. 

Gross Salary:
Gross Salary is employee provident fund (EPF) and gratuity subtracted from the Cost to Company (CTC). To put it in simpler terms, Gross Salary is the amount paid before deduction of taxes or other deductions and is inclusive of bonuses, over-time pay, holiday pay, and other differentials.
Employee Provident Fund, in India, is an employee-benefit scheme prescribed by the Ministry of Labor which provides employees with facilities such as medical assistance, retirement, education for children, insurance support, and housing. The Employee Provident Fund Organization (EPFO) has the authority to mandate policies on EPF, pension, and insurance schemes. The employer is required to contribute at least 12% of the employee’s salary towards his/her EPF.
Furthermore, the employee can then withdraw the full amount accrued in his/her PF account at the time of retirement, which is when the employee attain the age of 55 years.
In the occurrence of any of the following situations also, the employee can withdraw the amount accumulated in his/her PF account-

·         Termination of services
·         Retirement due to permanent disability
·         Migration for taking employee abroad

Gratuity on the other hand, is a section of an employee’s salary that is paid by the employer as a token of gratitude for the services the employee offered during the employment tenure. It is a defined benefit plan offered to the employee at the time of his/her retirement.
An employee may leave his/her job for various reasons, such as, retirement/superannuation, for a better job elsewhere, on being retrenched or by way of voluntary retirement.
Under Section 10 (10) of the Income Tax Act, an employee receives gratuity after completing 5 years or more of full-time service in an organization.

For the same example listed above, let’s deduce Mr. A yearly salary by subtracting gratuity and Employee Provident Fund contributions.
Rs. 4,00,000 - Rs. 21,600 - Rs. 18,326 = Rs. 3,60,074
This amount will now be considered as his gross salary, which is his total personal income before taking taxes and other deductions into consideration.

Net Salary or Take-Home Salary:
Net salary, more commonly known as Take-Home Salary, is the income that the employee actually takes home once tax and other such deductions are carried over with. It refers to the in-hand figure that is calculated after deducting Income Tax at source (TDS) and other deductions as per the relevant company policy.
Net Salary is Income Tax deductions, Public Provident Fund, and Professional Tax subtracted from gross salary, which means,

Net Salary = Gross Salary (-) Income Tax (-) Public Provident Fund (-) Professional Tax

Public Provident Fund and Employee Provident Fund are a stipulated percentage of the employee’s salary, typically no less than 12% of the basic salary. Whereas, gratuity is a percentage of the basic salary, typically 4.81% of the employee’s basic salary.
Therefore, an employee’s take home pay should ideally look like-

Take Home Pay / Net Salary = Direct benefit (-) deductions (taxes, PF etc.)

Income Tax in this case, is deducted at source by the employer and is based on the gross pay of the employee. Also, basic salary of an employee should be at least 50%-60% of his/her gross salary.
Mr. A’s Salary Example:
In Mr. A’s case, he comes under the 10% Tax Slab as his salary falls between the Rs. 2,50,001- Rs. 5,00,000 range.
Mr. A’s income stands at Rs. Rs. 3,60,074.
10% of Mr. A’s income would come up to Rs. 36,007.4.
So, Mr.A’s income after tax and other deductions would be Rs. 3,24,066.6
Bottom-line, the various aspects of a salary isn’t as complicated as it is made out to be. A quick read of this page would give you all the details you will ever need.

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